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Input versus Output Taxation in an Experimental International Economy

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  • Arno Riedl

    ()
    (CREED, Faculty of Economic and Econometrics, University of Amsterdam)

  • Frans van Winden

    ()
    (CREED, Faculty of Economic and Econometrics, University of Amsterdam)

Abstract

This discussion paper led to a publication in 'European Economic Review' , 56(2) 216-32. This paper is concerned with a policy oriented macroeconomic experiment involving an 'international' economy with a relatively small 'home' country and a large 'foreign' country. It compares the economic performance of two alternative tax systems as a means to finance unemployment benefits: a sales-tax-cum-labor-subsidy system versus a wage tax system. The two systems are applied to the home country, while the wage tax system always obtains in the foreign country. In stark contrast with expectations of experts the sales tax system clearly outperforms the wage tax system, using standard economic indicators. It is argued that producers' reluctance to incur costs up-front while being uncertain about product prices can explain this outcome. Several pieces of evidence are provided to support this claim. The results strongly suggest that behavioral aspects have to be taken into account also in applied macroeconomic models.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-058/1.

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Date of creation: 08 Jul 2003
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Handle: RePEc:dgr:uvatin:20030058

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Keywords: laboratory experiment; wage tax; sales tax; macroeconomic policy;

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References

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Cited by:
  1. Casoria, Fortuna & Riedl, Arno, 2012. "Experimental Labor Markets and Policy Considerations: Incomplete Contracts and Macroeconomic Aspects," IZA Discussion Papers 7102, Institute for the Study of Labor (IZA).
  2. Roberto Ricciuti, 2004. "Bringing Macroeconomics into the Lab," ICER Working Papers, ICER - International Centre for Economic Research 26-2004, ICER - International Centre for Economic Research.
  3. Jason Shachat & Zhenxuan Zhang, 2012. "The Hayek hypothesis and long run competitive equilibrium: an experimental investigation," Working Papers 1201, Xiamen Unversity, The Wang Yanan Institute for Studies in Economics, Finance and Economics Experimental Laboratory, revised 29 Jun 2013.
  4. Arno Riedl, 2009. "Behavioral and Experimental Economics Can Inform Public Policy: Some Thoughts," CESifo Working Paper Series 2902, CESifo Group Munich.

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